World Economy Can Bounce Back Strongly, Says Dervis

• Author: International Monetary Fund

"Whether this growth can be realized does, however, depend on demand side management both at the national level, and through improved global macroeconomic policy coordination," said Dervis, who is a former head of the United Nations Development Program.

Delivering to a packed crowd the Per Jacobsson Lecture, titled "Growth After the Storm," Dervis said that whereas a year ago, the world was on the edge of a financial and economic abyss, a vigorous policy response by major economies and concerted action by central banks forestalled a much worse disaster.

"What happened on Wall Street in September of 2008 was the financial equivalent of the Cuban missile crisis of 1962. We came very close to a complete meltdown - as the world had come very close to nuclear war in 1962. But the meltdown did not take place," he said.

Need to stay alert

Dervis, currently Vice-President, Global Economy and Development at the Brookings Institution in Washington and Member of the Board of Overseers of Sabanci University in Istanbul and formerly head of UNDP, said it was important not to make the mistake of thinking that because output indicators are now improving, the policy response was unnecessary, or that, in the years to come, macroeconomic management can be on "some kind of auto-pilot, rather than being responsive to ever changing circumstances." It may well be that a continued worsening of income distribution in countries such as the US and China could be as significant a demand-side threat to global growth, than the US and Chinese current accounts deficits and surpluses.

In his address, Dervis focused on the chances that the world could return to the growth levels of 2002-07, which averaged 3.2 percent globally. Some economists have suggested that the world will see below trend growth over the next few years because of longer term damage from the crisis.

But Dervis argued that that the world has the potential for very rapid growth, by historical standards, over the coming decade, because of strong supply side factors.

Supply side drivers

He identified the main drivers of growth in potential output as:

* Technical progress because of innovation and new knowledge, mostly taking place in the most advanced economies operating close to the knowledge frontier.

* The speed of diffusion of knowledge and technology.

* The...